Did you see an M&A increase in 2011 in Vietnam and in which sector?
According to the statistics gathered by PwC from various sources, including Mergermarket, StoxPlus, Bloomberg and our own research, M&As reached record levels in 2011 with a value of $2.5 billion compared to $1.6 billion in 2010 based on the same sources, although volumes were down with only 60 announced closed deals compared to 345 in the prior year. M&A deals in the financial services sector were again very significant with a total value of $786 million from five announced deals, the largest by far being Mizuho’s acquisition of a 15 per cent stake in Vietcombank.
Other significant deals included Mount Kellett Capital’s $100 million investment in Masan Resources, Masan Corporation’s $51 million investment in Vinacafe and Marico’s $85 million purchase of a controlling stake in International Consumer Products Corporation.
Do you think M&As will continue growing this year?
PwC is experiencing significant deal flow at present from transactions which are ongoing. At the same time there are high levels of interest in acquisitions of Vietnamese target companies from foreign strategic and financial investors with many new companies visiting Vietnam to assess the market potential and seek out target companies. It seems likely that M&As will continue at high levels in 2012 with inbound acquisitions remaining significant, being driven by high levels of interest amongst Asian investors, especially those from Japan and Korea, that are looking to tap into Vietnam’s growing economy, large population and its strong resource base.
There are other factors that may stimulate M&A in 2012. First, ongoing high interest rates in Vietnam will lead to many companies looking for equity investors to provide them with cheaper sources of funding for expansions or to pay down debt or in some case will lead to them exiting altogether from some of the investments/projects they can no longer afford to finance.
This may be seen most acutely in the real estate sector where depressed demand and high interest rates are causing developers considerable pain and may lead to a high level of exits with deals more likely to be done between domestic investors rather than selling to foreign buyers and therefore in many cases there will be limited public announcements regarding transactions that do occur.
Second, the reorganisation of the banking sector is likely to drive higher levels of M&A in this sector, with both domestic and inbound deals likely. Bank mergers, whether forced or voluntary should occur in order to achieve some consolidation of the private banks.
However, whilst volumes are likely to be strong, deal values may drop unless one or two very large deals such as the Mizuho deal occur during the year.
How will the M&A picture look at the end of this year?
The prospects are quite good since the economy has stabilised to a large extent and is continuing to grow whilst the fundamentals haven’t changed - the demographics for example are still very attractive to inbound investors. In addition, certain domestic companies achieved strong results in 2011 and are cash rich and looking for ways to ensure that they continue to expand with acquisitions being one possible route.
Signs of improvement in the global economy are also encouraging for M&As in Vietnam since overseas companies will have more confident in the future thereby stimulating M&A levels globally, including in Vietnam, although clearly the ongoing debt crisis in Europe and the slowing of the rate of growth of China may counteract this trend somewhat. Private equity investors also seem to be more active now than in the past three years since deal values are a little larger than in the past and the pricing of deals is more reasonable than in the peak activity period of 2007/8.
In your view, which sector will be the most attractive for M&As in 2012?
Financial services and fast moving consumer goods remain the two most attractive sectors to investors since Vietnam has a growing, increasingly affluent population which as yet does not make extensive use of banking services but is increasingly able to make discretionary purchases due to their higher average earnings. In addition, the State Bank’s encouragement of banking sector consolidation will lead to a number of the stronger domestic banks looking to absorb smaller, weaker banks thereby achieving critical mass and a larger network quickly.
However, we would highlight that currently we see interest in M&As in almost all sectors of the economy including mining, infrastructure, retail, manufacturing, services and real state.
What critical issue do you think should be recognised by mergers?
Whilst consolidation in the banking sector should be beneficial to the industry we would advise caution when considering such deals since many M&A transactions do not create long-term strategic value. It is important to conduct appropriate levels of due diligence before completing an M&A transaction and to fully consider the issues surrounding integration of the company being acquired into the buyer’s human resource, IT and operations will be a significant challenge and should be considered before, during and immediately after the M&A transaction is conducted.
Support from appropriate experienced advisors, such as PwC, could therefore make a big difference to the success of such a project especially since internal resources would be severely stretched by any large merger.
What should Vietnamese policy-makers do to help M&A activities in Vietnam?
An acceleration in the speed of equalisation of some of the larger state owned companies would certainly lead to an increase in M&A activity since one of the key issues facing interested investors is the lack of targets of a suitable size. Many large PE firms and strategic investors look for a minimum deal size of $20 million upwards, some even as high as $100 million hence a significant proportion of the Vietnamese private companies are too small to attract interest.
The state owned companies are generally going to be larger in size and therefore may attract significant interest from overseas. The other issue potentially inhibiting M&A is the cap on ownership in certain business sectors and the 49 per cent cap on foreign investment in public companies.
Ultimately, stabilisation of the economy, which has been achieved to a large extent already, will be critical to attracting foreign buyers since there has been considerable concern over the past year amongst investors over the high inflation and interest rates and the prospects for the economy going forward.